Consumption and Portfolio Rules for Time-Inconsistent Investors

Jesus Marin-Solano and Jorge Navas

Papers from arXiv.org

Abstract: This paper extends the classical consumption and portfolio rules model in continuous time (Merton 1969, 1971) to the framework of decision-makers with time-inconsistent preferences. The model is solved for different utility functions for both, naive and sophisticated agents, and the results are compared. In order to solve the problem for sophisticated agents, we derive a modified HJB (Hamilton-Jacobi-Bellman) equation. It is illustrated how for CRRA functions within the family of HARA functions (logarithmic and potential cases) the optimal portfolio rule does not depend on the discount rate, but this is not the case for a general utility function, such as the exponential (CARA) utility function.

Date: 2009-01, Revised 2009-03
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Citations: View citations in EconPapers (1)

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Journal Article: Consumption and portfolio rules for time-inconsistent investors (2010)
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Persistent link: https://EconPapers.repec.org/RePEc:arx:papers:0901.2484

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